fredag 21. desember 2012

Did Keen predict the US housing bubble ? - Dick Bezemers flawed study

I believe that Keens model of the business cycle is basically correct (though some of his interpretation is wrong) and that is simply because it is a rehashing of the Austrian Business Cycle Theory in Keynesian language.

So it doesnt matter to me whether Keen has accurately forecast the global financial crisis or not, if his view of the cycle is correct (and it basically is correct with some caveat to that).

But the dishonest blogger "Lord Keynes"/"Socialdemocracy21st" has made a blog input(several in fact), which I demolish completely here, claiming that Austrians did not in fact predict the housing bubble. Instead he selectively quotes articles until 2003 and when they do predict it properly he simply dismisses them.

But more importantly here, he uses Dick Bezemers study (a post-keynesian) to prove that Keen predicted the US housing bubble and worldwide financial crisis more correct or better or something like that. Similiarly does Unlearningecon, another post-keynesian blogger. But this claim is wrong.

Keen has never predicted the US housing bubble (EDIT: Unlearningecon has pointed me to his debtwatch reports and in april 2007 he starts showing graphs of US debt levels and even though he does not "predict" anything specific, I will accept this is an indication that he was showing that the US would have private credit contraction, but the Bezemer study is still flawed). He has predicted an Australian housing bubble in the article Dick Bezemer refers to. Here is the name: "The lily & the pond".

Here is what Dick Bezemer quotes from him:

"Long before we manage to reverse the current rise in debt, the economy
will be in a recession. On current data, we may already be in one.” (2006)" - Stephen Keen

But here Keen is talking about Australia, and that has not happened yet (5 years, soon 6). His "aggregate demand+change in debt" model has failed to predict accurately. According to post-keynesian methodology this makes the model, unscientific.

I have asked Dick Bezemer whether he has analyzed the following Austrian articles which predict a housing bubble and financial crisis:

Keen also repeatedly uses this study(in his book[1], website and journal article), and has nothing else to show to (EDIT: He can show to his theory and his graphs of US debts as indications that he understands the problem, but if kept to the same standard "Socialdemocracy21st" holds Austrians to, he hasnt in fact predicted anything correctly).

12 kommentarer:

I think your criticism should be directed at Bezemer, not Keen. Keen predicted a global housing bubble multiple times. Even in the article you use, he may have been specifically talking about Australia, but it's obvious his model also applies to other cases and it would be stupid to assume he was only talking about Australia. The Australian case is an interesting one, but there is no doubt that it is a huge bubble and will eventually burst. As Mises noted, we can never know when a bubble will burst. As far as I know, Keen agrees with this.

ABCT and Minsky are in basic agreement. I prefer Minsky because it emphasises the endogeneity of the money supply (something Hayek noted with his notion of "pseudo-money", but did not emphasise, preferring to emphasise the importance of government/central bank money printing). The greater credit creation during the last bubble was private money, specifically various shadow banking instruments that were monetised through the hypothecation web.

I think that both you and Lord Keynes are making a mistake in saying "our side got it right, and the other side got it wrong!" when both Austrians and post-Keynesians got it right and the neoclassicists were the ones who really got it wrong.

Yes, his model applies to the US crisis. I make it clear from the beginning that I regard his model as basically correct. But he didnt make that prediction and he attempts to use it as such, and "Lord Keynes" is even more nitpicky in the way he estimates Austrians. If he held Keen to the same standards, he would have to erase him from the list.

"As Mises noted, we can never know when a bubble will burst. As far as I know, Keen agrees with this."

No, Keen stakes his economics on valid predictions as reflection of understanding the real world.

"I prefer Minsky because it emphasises the endogeneity of the money supply (something Hayek noted with his notion of "pseudo-money", but did not emphasise, preferring to emphasise the importance of government/central bank money printing)."

This is wrong. ABCT is a theory(in Hayek and several forerunners work) of how fractional reserve banking causes booms and busts, and thereby "endogenous money". But endogenous money is wrongly applied in the modern world by Keen as money is not endogenous and his distinction is too static.

Read Jesus Huerta de Sotos book, the current doyen of austrian economics and most important exposition of ABCT. Read specifically his critique of Selgin and White, where he picks up on this "endogenous" theme.

"I think that both you and Lord Keynes are making a mistake in saying "our side got it right, and the other side got it wrong!" when both Austrians and post-Keynesians got it right and the neoclassicists were the ones who really got it wrong."

I agree. I am in no way trying to say that post-Keynesians have not gotten the most important part of why economic crises occur namely credit creation.

I am simply critiquing this study and the use of it by Keen, Lord Keynes etc.

"This is wrong. ABCT is a theory(in Hayek and several forerunners work) of how fractional reserve banking causes booms and busts, and thereby "endogenous money"."

No,m that does not follow.

"But endogenous money is wrongly applied in the modern world by Keen as money is not endogenous and his distinction is too static."

OK, so this contradicts what you *just said* as well as again not making sense, seeing as Keen's model is dynamic.

"Read Jesus Huerta de Sotos book, the current doyen of austrian economics and most important exposition of ABCT. Read specifically his critique of Selgin and White, where he picks up on this "endogenous" theme."

Please make arguments yourself instead of referring people to the work of others.

I had looked for the debtwatch reports but didnt find them, so thank you.

http://www.debtdeflation.com/blogs/pre-blog-debtwatch-reports/

Concerning 2006, here are the two debtwatch reports from 2006:http://debtdeflation.com/blogs/wp-content/uploads/2007/03/SteveKeenDebtReportNovember2006.pdfhttp://debtdeflation.com/blogs/wp-content/uploads/2007/03/KeenDebtWatch200612.pdf

They concern Australia, so the point holds.

Furthermore the Dick Bezemer study is still wrong, and Keen uses it as "proof" that he predicted the "Global Financial Crisis".

""This is wrong. ABCT is a theory(in Hayek and several forerunners work) of how fractional reserve banking causes booms and busts, and thereby "endogenous money"."

No,m that does not follow.

"But endogenous money is wrongly applied in the modern world by Keen as money is not endogenous and his distinction is too static."

OK, so this contradicts what you *just said* as well as again not making sense, seeing as Keen's model is dynamic."

Read my critique of his interpretation of Austrians. He makes a distinction between "government-created-money" and "private-created-money" that is artifical.

Banks are nominally private, but are able to create money as they do in the legal and institutional(regulations, fiat money, central banking etc.) setting. Simply labeling them "private" is not helpful.

""Read Jesus Huerta de Sotos book, the current doyen of austrian economics and most important exposition of ABCT. Read specifically his critique of Selgin and White, where he picks up on this "endogenous" theme."

Please make arguments yourself instead of referring people to the work of others."

That is a double-standard, as you dont.

Basically, in "free" fractional-reserve banking, fractional-reserve banks create money as they see fit according to the expected profitability. But under central banking, other constraints kick in as well at the same time that former limitations on credit creation are removed.

See for example "The Mystery of Banking" and Chapter 4 in "Money, Bank Credit and Economic Cycles"

Furthermore your attitude is typical of post-keynesians, unfounded dismissal. Atleast I can read different views with an open mind.

Ok, bad taste perhaps. As I have said earlier, it was meant to be directed towards Aziz(as a sort of joke). It is perhaps bad taste anyway, so point taken.

I read your blogpost called "some thoughts concerning austrian economics" and you referenced Lord Keynes. You made the same claim as him.

Yes, as I point out above after you showed me the debtwatch reports, he first started saying this in april 2007, not 2006 as Bezemers study claims.

He also doesnt actually predict a housing bubble, he just says:

"The USA's sub-prime market is indeed a peculiarly American phenomenon; but the level ofAustralian household debt (the sum of mortgage debt and personal debt) is every bit as extremeas the USA's. And contrary to popular opinion, our debt binge dwarfs America's. As the chartbelow shows, Australia's household debt to GDP ratio has been growing more than three timesas rapidly as the USA's since 1990. The ratio has grown at an average of just over 2% perannum in the USA; it has grown at over 6.8% per annum here."

and then:

"The aggregate level of debt in the USA, at over 320% of GDP, is staggering--especially sincethis does not factor in the "off-balance sheet" activities of the derivatives market."

and then:

"I can't do better as a commentary on this situation than to quote a recent editorial from theNew York Times:Investors who fail to take a hard look at the vulnerability of the American economyare courting tremendous risk. The fact that after years of profligacy the federalgovernment is fiscally ill prepared to respond to a destabilizing downturn onlyincreases those risks. New York Times "Unwary Investors" (March 24 2007)"

Given the context and his theory, I would say that he is aware of the problem and not predicting a specific crisis. But I could concede that he is predicting, but that is a stretch.

The Austrians clearly predicted the bubble and similarly the dot-com bubble, whilst Keen had not made any specific calls by 2007. Mind you, THAT does not invalidate his model or theory in my eyes (there are other problems) but it should according to yours(empiricism).

Money is created endogenously. It always has been, beginning with barter and social credit, and extending to the early commodity monies. It still is today even in the era of government-denominated currencies and legal tender laws.

Hmm, that seemed to be from 2008. But I have changed it, because Unlearningecon provided me with debtwatch reports.

" It always has been, beginning with barter and social credit, and extending to the early commodity monies. It still is today even in the era of government-denominated currencies and legal tender laws."

So, when Bernanke prints 600 billion in QE thats "endogenous" ?

If I make a contract with another party to settle a debt in gold, and the other party forces me to accept paper notes of dubious value, and if I take him to court for breaking the contract and the judge rules in favor of him. Then these "paper notes" are "endogenously created" ?

I think not, you seem to be presuming anything is "endogenously created". Furthermore I do not accept this false account of money and barter. I know that credit appeared before money, but not the way post-keynesians make it out.

Money is whatever people decide subjectively to use as to store purchasing power, to mediate exchange and to store value. There are lots and lots and lots of different monies. Governments may attempt to predesignate something as the medium of exchange, but the shadow intermediation system is proof that even in the modern world other intermediaries can emerge. Look at Zimbabwe — they faced currency collapse because the people lost faith in the government-designated currency. When Bernanke "prints money" he is not necessarily printing something that people will accept as "money". That is determined in the market.

I agree with that, no central planner can without limitations impose a money. But legal requirements and impositions can make something more desirable as money.

"Look at Zimbabwe — they faced currency collapse because the people lost faith in the government-designated currency. "

Yes agreed, good point. The crucial thing I think is that the necessary cost of exiting government-designated money is alot higher than exiting purely free-market money.

But I cannot square this with the notion that Bernankes money creation is "endogenous", and you said it "always has been". Are you saying that Bernanke can print "exogenously" but that its value will always be determined "endogenously" ?

Money is literally anything liquid and fungible that is a store of purchasing power, medium of exchange, unit of account, not just whatever the central bank calls money. Gold and silver are still monies as they are still used to store purchasing power and as a unit of account.